Rose Report: Issue 21

Avoiding Costly Mistakes in Payroll

Many companies view payroll as just one more item to check off the to-do list. But creating standardized processes and keeping up-to-date records is crucial to a company’s financial well-being. Here are six common mistakes that companies make when processing payroll—and tips for how to avoid them.

1. They don’t keep their employee records up-to-date.
Maintaining a formalized payroll recording system helps avoid such common blunders as paying workers who no longer work for you, maintaining incorrect addresses for employees, improperly calculating benefit and tax withholdings, and improperly recording raises and other changes in salary.

2. They still file their own payroll tax returns.
Most companies benefit from the cost efficiencies provided by payroll service bureaus. Additionally, as a company grows, its filing status often changes—sometimes without them even realizing it. Larger companies are required to file electronically and can get penalized if they don’t do so.

3. They don’t reconcile all of their documents.
Every quarter, a company should verify that its 941 forms, payroll register, and general ledger all contain the same information; once a year they should also reconcile employee W2s against these records.

4. They do not maintain an adequate level of confidentiality.
Payroll records should never be emailed around. Instead, a payroll system should be hosted in a secure environment and information should not be disclosed to anyone outside the HR or payroll department.

5. They misclassify their workers.
Many companies hire temporary employees, consultants, or independent contractors. It’s key to distinguish these types of workers from full-time employees. Says accountant Sharada Bhansali in Accounting Today: “Small businesses may avoid the extra costs of having employees (Social Security, workers’ compensation and state unemployment insurance) by classifying workers as independent contractors and paying them with vendor checks. If they are misclassified, businesses may be held liable for employment taxes for that worker.”